The previous article in this column had discussed the basic features of the proposed dual Goods and Services Tax (GST) and the typical treatment of the Telecommunication Sector thereunder, given the significant role of the sector in the economy as well as the broad challenges that the sector has faced under the present indirect tax regime. This article deals with these issues in greater detail and the possible treatment under the GST regime that would mitigate these concerns and ensure an equitable and easy to administer regime for the sector.
To recapitulate, the total incidence of regulatory charges and indirect taxes presently borne by the telecom sector ranges from 22 per cent to 32 per cent in value terms. It is now certain that proposed GST would subsume a majority of the federal and State indirect taxes such as excise duty, service tax, VAT, entry tax etc., There is however no proposal at all to subsume the regulatory levies such as license fees or spectrum fees in the GST. These are at high levels and are expected to remain so, for the foreseeable future. It is therefore imperative that the rate of GST on telecom services and on mobile phones is maintained at an appropriate level in order to ensure affordability of services. This is the first and key point, as highlighted in the previous article.
The second challenge of taxation of the sector has been that of double taxation. Taxability of SIM cards is a classic illustration of this problem. The point of course is that a transaction is either a supply of goods or the provision of services (or possibly a bundled supply of goods and services) and hence cannot be subject to the levy of both the sales tax and the service tax.
This point is equally true of bundled supplies where the respective goods and services taxes ought to apply to mutually exclusive parts of the said supply. With the advent of the GST, a key expectation would be the resolution of this endemic problem. The idea is to ensure that the GST applies equally, at the same uniform rate, on taxable supplies of both goods and services. However, should the tax rate vary across goods and services, and possibly across categories of goods themselves, the problem is not resolved and the task would be then to ensure that the GST rules clearly categorize telecom services as constituting a taxable supply of services, say, in order that the problem is resolved.
The third challenge, resulting from the dual GST that is under consideration, is the determination of the time and place of supply of telecommunication services, in order for the appropriate CGST and, more importantly, the SGST to be charged on such supplies, bearing in mind that the intended GST will be destination based. Typically, telecom services are supplied by operators located centrally, to the subscribers located all across the country.
As a result, it is possible that more than one State Government may proceed to charge SGST on such services, in the absence of clear rules.
For instance, if a subscriber based in Maharashtra avails roaming services while travelling from say Mumbai to Bangalore, both the Maharashtra and Karnataka Governments can potentially charge the SGST; Maharashtra by virtue of the location of the subscriber in its State and Karnataka by virtue of the actual consumption of telecommunication services within. To avoid such a situation, it is imperative that the GST code incorporate clear supply of services rules, indentifying the appropriate State for levy of the SGST.
In the case of Canada, which has also implemented a version of a dual GST (HST) model, there are well defined parameters to determine the place of supply of telecom services. These can be considered for adaptation to India as well. The EU, as the bastion of the GST, could also be studied for identifying best practices with regard to taxation of telecom services and, in particular, the taxation of prepaid cards/vouchers, interconnect services, roaming services, free supplies of telecom services, bundled supplies of mobile phones with the purchase of new telecom connections and so on.
The point is that the telecom markets of UK /Europe are very advanced in scope and scale, leading to constantly evolving GST laws to cope with the technological advances in the sector. India could potentially evolve a sophisticated GST regime for the telecom sector if these laws were to be analysed for potential adoption. This is notwithstanding that the EU itself is overhauling its GST laws through the introduction of the VAT Package and the like.
Yet another key imperative for the sector is taxation of mobile phones. Clearly, these have been instrumental in enhancing communications acr-oss all strata of society and hence a key facilitator of economic growth. In recognition of this potential, several countries have provided for concessional or low rats on such phones. For example, in Sri Lanka, while the standard VAT rate is 12 per cent, the supply of mobile handsets is exempt from the levy. Given the importance of the telecom sector for Indias economic growth, it is critical that policy makers seriously consider that advantages and benefits of extending the present practice of giving preferential treatment to mobile handsets in the GST scheme of things.
To conclude, the telecom sector is multifarious and revolves around the telecom service providers, the passive infrastructure providers (i.e. the tower companies) and the equipment and mobile handset manufacturers. While the First Discussion Paper outlines the broad contours of the proposed GST model, it has not delineated the tax treatment for specific sectors of the economy. Hence, there is still a lack of clarity as to how several specific industries will be taxed, given their peculiarities and challenges.
The foremost task is to set out clear rules for determining the situs or place of consumption of taxable supplies of goods and services in the GST model, in such circumstances. This is particularly critical for the telecom sector. Equally critical is the need to ensure a seamless GST credit offset across the passive infrastructure and equipment sub sectors to the service providers. Finally, and perhaps most important, is the need to ensure that telecom services remain affordable and continue to be an engine of growth, through a judicious choice of the relevant GST rates for telecom services and mobile phones.